Promissory Note Investing – Appraising the Risks

Investor Education—Legitimate Investing Risks Compared to Fraud Risk-Understand the Difference

A promissory note is a form of debt; it is similar to a loan or an IOU. A person or company needing money may issue a promissory note to an investor in exchange for money. The investor agrees to loan money to the person or company for a set period of time, at a specified rate of interest, with set repayment terms and conditions spelled out in the note document.

Investors seek safe, fixed-rate investments, that promise to deliver interest rates that appeal to them.

In today’s low interest rate environment finding appealing interest rate investments is a challenge; banks and credit unions now pay from.50% to 1.50% annually; we are in the lowest interest rate period of modern times.

To increase the interest rate requires taking on more risk. Remember, there always is a direct correlation between the risk assumed and the reward received. Every investment involves some degree of risk, and the highest-yielding investments usually carry the highest levels of risk. A high yield is an investing red flag. It warns the investor to stop and carefully evaluate the investment to understand why the yield is high and what are the risks being assumed. Above market returns suggest higher risks.

Understanding Risk
Every investing situation is different. No “one-size-fits-all” rule exists that explains what causes risk and how much risk exists. The best way to gain understanding of a specific investing situation is to ask tough questions. Demand clear, direct understandable answers – before moving forward with an investment. An investing decision to buy or make a promissory note investment should be based on solid facts and clear understanding. Be sure you understand how the investment will be repaid, and how the periodic payments will be made; learn where and what the potential problems and risks are. Understanding is the key to safe investing.

Types of Risk

Fraud Risk
Risk Free—Many con artists will try to sell a risk-free return. In reality, nothing is risk-free and this should be kept in mind when someone is telling you otherwise. If someone is pitching the idea that a promissory note investment is a “risk-free” with a large potential return, the warning bells should ring! Watch out for promissory notes that are supposedly “insured” or “guaranteed. That story is probably too good to be true; be skeptical that it is a legitimate investment. Beware of promises of “risk free” returns. These claims are the bait con artists use to lure in their victims. Always remember that if it sounds too good to be true, it probably is untrue.

Repayment Risk
The borrower may have honorable repayment intention and still cannot keep the repayment promise. Adverse business conditions, new laws, new inventions, new competitors, changing customer habits, and personal health issues are some of the inherent risks related to the repayment of borrowed funds.

Interest Rate Risk
Interest rates constantly change. The changes are driven by government policy and the supply and demand for money in the market place. The risk always exists that a fixed-rate promissory note will be out of sync with market rates in the future. This will impact its resale value.

Market Risk
The market for investing in notes constantly changes due to local and national business conditions, supply and demand for investments, available cash in the market place, and investor’s view of future events.

Inflation Risk
Historically, over the life of this country, we have had inflation. Inflation devalues fixed rate investments. Inflation reduces the purchasing power of the dollar. A dollar repaid in the future will not have the same purchasing power as it had when the investment was made. The longer the term of the promissory note the greater the risk of lost purchasing power of the dollar.

Risk is an inherent part of investing. Since risk cannot be avoided when investing, investor education is critical to success. Risk management and risk recognition are the foundation of long-term investing success.

Understanding The Basics Of Gold Investing

Investment in a precious metal like gold is one of the best investment decisions that you can ever make, especially during these tumultuous economic times. In fact, investing in gold can safeguard your portfolio against dangers of inflation, wars and natural disasters as well as fluctuations in stock prices. However, like with any other investment option, gold investing does come with its share of risks; and you need to understand and mitigate such risks in order to realize the desired returns on your investment.

Benefits of investing in gold

It is human to seek a rationale for doing something, especially when money is involved. Here are three key benefits that you can realize from gold investments.

1. Protection from inflation

During times of inflation, money tends to lose its purchasing power resulting in a rise in the cost of living. However, forces of inflation never affect gold prices. Thus, investing in gold can be an excellent way of cushioning your money from the forces of inflation, resulting in great returns on capital.

2. Liquidity

One of the greatest benefits of investing in gold is its high liquidity or how quickly you can offset your gold for cash. If you have ever tried to get quick cash from your home or car sale, then you understand how difficult it can be finding the right buyer with the right offer. The same is not true of gold. Exchanging gold for cash is very easy. All you need to do is get to a precious metal dealer in your area and sell your gold at the current market value. No hassle!

3. Safe investment

During tough as well as good economic times, gold has retained its reputation as a safe investment option. For example, an ounce of gold could have bought you a piece of suit at the turn of the 20th century. Today, and ounce of gold is selling for about $1300, which is more than you need for a nice piece of suit. The same cannot be said the dollar which have lost its value significantly over the past century. This makes gold investments the best choice for investors who are looking for the best retirement saving plans.

Gold investments: Your options

Gold investments come in various forms. All you need to do is identify your investment goals. If all you want is grow your portfolio and make profits at the right time, then you might want to consider investing in physical gold. This can be in the form of gold bars, coins or biscuits. Here are some of the best gold investing options that you might want to consider.

1. Physical gold

Gold was one of the first forms of legal tender in the world. If you are considering investing in physical gold then you may want to buy gold coins and bullions. The best way to do this is by buying government produced gold coins and bullions. These are commonly used as currency and are more expensive than other types of gold investments. Examples of gold coins that you may consider buying include American Eagle Coins and Canadian Maple Leafs.

2. Gold IRA investment

If you are looking for a retirement planning tool, then you need to invest in gold IRA. IRAs OR Individual Retirement Accounts were created by the IRS to help American citizens save for their retirement. There are two types of gold IRA investment options — gold roth IRA and conventional gold IRA.

Gold is justly referred to as the ultimate haven for investors. Investing in gold can provide you with a great hedge against currency weakening, economic and natural crises as well as forces of inflation and deflation. When the going gets rough and other investment options take a beating, gold investments will always deliver positive returns. In addition, unlike currency, gold has a real intrinsic value, retaining its purchasing power through generations.

Three Investing Myths To Unlearn Before Investing

I am sure you have heard this axiom: If you don’t know where you are going, you will get there. Many folks investing today are on that path: they are investing without proper knowledge of the stock market, of investment basics, and lacking simple, concise, written goals. Later, these folks will experience great challenges.

Among other things, the Federal Reserve’s Quantitative Easing program, a euphemism for pumping money into the economy, is fueling rising stock markets. This could entice even more folks to invest in stocks because they might see opportunities to ‘make money.’ Beware; before investing, at least, ensure you dispel three popular investment myths, and understand the potential investment’s opportunity cost.

  1. Investing in the stock market is gambling
  2. Low priced stocks, especially those at 52-week lows are worth buying
  3. Investment analysts and advisors know how investments will perform

Investing In The Stock Market Is Gambling

Simplistically, investing is just another spending form. You buy a book, a car, a house, and you buy stocks, bonds, or other investment instruments. The key is to develop a solid process to follow instinctively before spending: a spending decision process.

Your attitude will decide how you behave, and so, you could choose to spend on stocks and bonds – invest – with a gambling motive. That’s why I advise folks never to invest unless they fulfill specific prerequisites, such as being debt free with an established process to replace major assets for cash, and having clear, concise, written investment goals.

Then again, even with clear goals, individuals need to know that consistent, solid earnings is the key sustainer of a business’ value, and ultimately, its stock market price.

Low Priced Stocks, Especially Those At 52-week Lows, Are Worth Buying

Here is a trap to avoid. A stock is trading at its 52-week low, falling over 50%, and you think it presents a buying opportunity. Maybe; on the other hand, maybe not! Likely, that business’ products and services no longer have the capability to produce previously perceived earnings. Alternatively, investment analysts and others may have promoted this business because of some fad or other irrelevant reason. Yahoo! and Nortel are examples of companies whose stock prices traded at unsustainable levels; after the expected collapse, their stock prices did not recover. Many other examples exist, particularly on the Japanese stock exchange.

As I mentioned above, as with all spending, we need to follow a spending decision process before investing. This will allow us to use a fall in stock price as a trigger to identify business’ fundamentals and potential investment opportunities.

Investment Analysts And Advisors Know How Investments Will Perform

When you listen to these folks, you might forget that they, like you and I, have no clue about the future. Some are in conflicts of interest, blinded, and pushing particular products. Others might be sincere but are relying on the past. And we know, the past might not be a good predictor of the future.

Can these folks help? Certainly, but each client must try to understand whom his or her advisor represents, and accept that advisors do not know the future. Accordingly, folks receiving investment advice must be fully aware that they, not their advisors, need to decide when and how to act from advice they get.

Before you start investing, dispel the above three myths, learn key investment basics, and learn and make sure you fulfill specific investing preconditions.

This final point is obvious but often folks overlook it. Investing in the stock market has an opportunity cost; it reduces, by amounts invested, funds available for other purposes. Ten thousand dollars invested in the market could buy a car, pay a portion of a college semester’s fees, or be donated to charity. Therefore, as part of your spending decision process, ask these three questions before deciding to invest:

  1. What other alternatives exists to use funds you are about to invest?
  2. Given your present and expected situation, is this the best use of funds today?
  3. Will you need to replenish these funds to carry out other specific goals in the next three to five years?

© Copyright 2013, Michel A. Bell

Is Your Property Investment Showing More Growth Than Unit Trust Investments in South Africa?

This article is intended to focus your attention on how important growth is in your personal savings environment, to make sure the investments in your portfolio are working for you and not against you.

Property investment versus Unit Trust investments can be very interesting and statistics are needed to help us understand… which is the best?

According to statistics from House Prize South Africa, Nominal Property Growth from 1981 to current has been 10.6%, but when you take inflation into account your Real Property Growth was only 1.2% to date.

In short, your investment should be tested against the growth of inflation, and should perform better than inflation. Even if it is growing somewhat, if it is not performing better than inflation, it is essentially losing steam. The term Real Growth is used when you minus your investment percentage with the inflation percentage.

Unit trusts a Great Alternative.

Registered Unit Trust investments are a safe alternative. Companies cannot run away with your money; you can only lose money if the fund performs poorly.

If we look at some top performing SA Unit Trust Companies Funds, we see that some of them had an average 10-year Nominal growth performance of about 17.8%. Over the past year, growth was at 12.2%; and since the Inception of 1999, the average Nominal growth has been 19.9%, while the average inflation for this period was 5.9%.

This means that the Real Growth was a very good 14%

According to published figures Unit Trusts investments has out-performed Property as an investment vehicle.

Safety and access to your money also plays a big role! How safe is your property investment? How much are you paying in property taxes per year? You can sell your property if you urgently need money. However, if this time period is not going to be favourable, then how quickly can you re-finance property to get money? If you can’t afford your Bond re-payment then you will have to sell your property in-time and perhaps at a loss.

In other words, if you have invested in property how quickly are you able to make this investment liquid?

Double Your Money

The golden rule with Unit Trust investments is to double your money every 5 years. Should you invest a lump-sum amount of 100 000 your investment will be 200 000 in 5 years. With this type of investment there is also no term restricting you when you can withdraw your money.

With a good Unit Trust investment, your capital should grow more than the average property investment, and your money will be more easily accessible should you need it urgently.

Just remember: do your homework on these investments. Most importantly the company needs to be a Registered Unit Trust Company and the Companies offering needs to have a long; respected and above average Performance Record.

Konrad Wentzel
+27 82 46 22212
0800 KONRAD (0800 566 723)
Wentzel Consulting (PTY) ltd
Independent Financial Planner
FSP: 7234